Tides turn in the USA

The US equity market has experienced an about-turn and is offering investors a wealth of opportunities, writes Mark Piper, co-fund manager of the Collins Stewart Select Opportunity fund.

Towards the beginning of 2011 it became clear the tides were turning and it was an appropriate time to tactically reduce exposure to Asian and emerging market equities and raise allocation to western equity markets.

While there remains a strong case for the secular growth trends of many emerging economies and the likely strong performance their equity markets will enjoy as a result, as year end 2010 approached a number of warning signals pointed to a short-term reversal in fortunes of many of these markets. These included rising inflation pressures, more restrictive monetary policies and valuations that were trading at a premium to their global peers.

At the same time, a market such as the US was enjoying a ‘Goldilocks’ period in its economic growth cycle. Here, economic growth is neither too strong that it will force the US Federal Reserve into early interest rate rises, nor too weak that the double-dip recession fears currently plaguing Southern Europe will resurface.

In addition, in the US you can access large global companies that are leveraging off the growth dynamics in emerging economies without paying a valuation premium.

The US equity market therefore has the potential to provide investors with a meaningful level of outperformance over the next six to nine months, as it has already done in the first quarter of 2011.

Findlay Park American

We believe three US equity funds currently provide good investment opportunities. The first is the Findlay Park American fund.

The managers of this portfolio adhere to simple core beliefs while aligning their interests with those of their investors. The team’s primary goal is not to lose money in any individual investment and stocks are not added to the portfolio just because they form part of the index.

The focus tends to be on less glamorous areas of the US market, and in particular, companies that generate excess cashflow. Generally, the portfolio consists of quality companies that are temporarily out of favour with the market. New investments should have the ability to double in two-three years and the team is patient with stocks, provided the downside is limited by sustainable cashflow.

The benefits of this simple strategy can be seen in the performance and risk charts above (figures 1 and 2).

Gartmore US Growth

Another fund that blends well for US exposure is the Gartmore US Growth fund. The management of this fund is outsourced to Denver-based Marsico Capital and as a result the management team has not been distracted by recent events at Gartmore and the company’s purchase by Henderson. Founder Tom Marsico is the manager of the US Growth fund, who is supported by a team of 18 global analysts.

Marsico generally avoids Wall St Brokers and produces 95% of its research in-house. As with the Findlay Park fund the managers and analysts at Marsico have a high proportion of their wealth invested in the firm’s funds.

This is a concentrated, research-driven, large-cap growth fund. It aims to provide diversification across themes and industries without sacrificing focus on the highest conviction ideas. Marsico seeks to find ‘high alpha’ stocks outside of the main market, which are cheap relative to their growth prospects. Its philosophy is centred on active management of the fund, leading to higher than average portfolio turnover and significant over/underweights relative to the benchmark.

Stocks generally fall into three categories: steady growers (50%-60%), aggressive growers (15%-30%) and life cycle change (the balance) – the latter being companies benefitting from a positive change such as new management or a new product. Allocations across these categories will vary according to the market cycle and management outlook.

While the fund’s returns are ‘lumpier’ than the steady consistency provided by Findlay Park, performance since Tom Marsico took over the management of the fund in June 2007 has been excellent (figure 3).